You can feel the frisson in environmental circles: for the first time in a long time, it’s okay to talk about limits to growth again. Jonathon Porritt has been doing a lot of it; Tim Jackson’s book Prosperity without Growth has catalysed much debate; even heads of respectable governments have been heard to utter the phrase.
Most recently, British Prime Minister David Cameron has tickled the greens’ tummies by announcing the unveiling of a new ‘happiness index’ (designed in large part by my friend Jules Peck, who ran the Conservatives’ environment policy commission in Opposition). From April next year, the Office of National Statistics will measure quality of life as well as economic growth.
Now, I’m all for measuring a wide set of indicators on how the nation is doing (although I think my brother Jules Evans is right to question some of the “spurious claims to scientific objectivity” that arise in attempts to measure and promote ‘happiness’ in public policy contexts).
But what I find odd is that, in their attempts to open up a debate about limits to growth, the environmental crowd have been focusing their fire on this whole area of indicators (and not just in the UK, either – c.f. the French-inspired Stiglitz Commission). It’s rather touching to think that the cure for endemic short-termism in political and economic systems might lie with methodological tweaks to the national accounts made by some unassuming, clipboard-toting statisticians at ONS. But surely we know better than that.
If we were really exploring how to operationalise a limits to growth agenda, we’d be talking not about indicators, but about the inner workings of banking, debt and indeed money itself.
Economic growth and debt, after all, are two sides of exactly the same coin. As soon as money is lent at interest, that interest rate in effect fixes the rate of growth that has to happen in order to keep the economy in the same place. This is the inevitable concomitant of fractional reserve banking, explained here by economist Ian Harris in an excellent lecture on money at Gresham College:
When a bank makes a loan, it does not match that loan directly with a deposit; it simply writes the loan as an accounting entry. Regulators require banks to retain a fraction of their deposits in reserve, but in essence, whenever a bank writes a loan, the bank is creating most of the money represented by that loan.
This process is known as fractional reserve banking.
It isn’t just governments that can roll metaphorical printing presses and create money; banks do so all the time when making loans. That is why, when economists talk about a country’s broad money supply, they are talking about a multiple of the base money created by the central bank. It is the multiple combination of commercial bank money and government fiat money that comprises the bulk of the modern ‘money system’.
This is where growth happens. And it’s essential to be clear that if one argues that growth has to stop, then so does lending at interest – and with it, the fractional reserve banking system on which modern finance is built (and which was, let’s not forget, so central to the buildup of risk that led to the financial crisis).
Remember too that it’s interest rates that effectively hardwire short-termism into economic behaviour, through the logic of discount rates. If, in valuing something that exists in the future, you use a high discount rate, then you’re in effect valuing the present and the near-future a lot higher than the long term future. (For cutting edge research on what a long-term approach to finance would look like, conversely, follow the work of the Long Finance initiative – a London-based spinoff of the Clock of the Long Now).
So this is what a real limits to growth agenda would focus on. It’s about banks, debt and money, not indicators of progress. It is, of course, also an agenda that remains politically unthinkable for the time being. But it’s possible to imagine that changing over the next decade or two. Here are three scenarios that could precipitate it:
- A peak of global oil production, followed by rapid decline in output;
- A more general resource crunch, driven by the collision of a world of finite resources with the inexorable logic of exponential mathematics (with a growth rate of 10% a year, China’s economy doubles in size every seven years); or
- A systemic financial crisis that led to debt itself being seen as an unacceptable risk (Bank of England Governor Mervyn King recently made a speech in which he discussed “the elimination of fractional reserve banking” to reduce risk).
Or, perhaps, some combination of all three. That would be interesting.
